JAPAN Law and Practice Contributed by: Hajime Ueno, Nishimura & Asahi (Gaikokuho Kyodo Jigyo)
Bankruptcy A creditor may file a petition to commence a bank - ruptcy proceeding by providing evidence to show the existence of the creditor’s claim, and facts constitut - ing grounds to commence bankruptcy for the debtor. Bankruptcy is available to all types of debtors, includ - ing individuals (but not partnerships, save for limited liability partnerships). Special liquidation A creditor, a liquidator, a company auditor or a share - holder may file a petition to commence a special liq - uidation by providing evidence to show the existence of circumstances prejudicial to the implementation of the liquidation or a suspicion that the debtor is insol - vent. Special liquidation is available only with respect to stock companies incorporated under the Corpora - tions Act. Requirement/criteria for commencement The grounds to commence bankruptcy are facts showing that the debtor is unable to pay its debts or is insolvent. With respect to a special liquidation, a suspicion of insolvency is required. Obligation to commence formal insolvency proceedings The current law does not require a company or its directors/officers to file for an insolvency proceeding, even when the grounds to commence insolvency pro - ceedings are met/satisfied. 5.2 Course of the Liquidation Procedure Once bankruptcy commences: • a payment of a pre-petition obligation is prohibited in general; • existing pre-judgment attachments are automati - cally suspended or extinguished; • a trustee ( hasan-kanzai-nin ) in a bankruptcy, or a special liquidator ( tokubetsu seisan nin ) in a special liquidation is appointed by the court; • the incumbent officers and directors lose their power and authority to carry out the debtor’s busi - ness and such rights are vested in the trustee or the special liquidator; and • in both bankruptcy and special liquidation, because they are liquidating-type proceedings
(entailing a discontinuance of the business), unless the competent court grants a special order to the contrary, the debtor will no longer continue to oper - ate the business. Roles of Trustee/Special Liquidator A trustee in a bankruptcy is a person or entity who has the right to manage and dispose of the property belonging to the bankruptcy estate. It owes a duty of care in its management towards all creditors. Specifi - cally, the trustee has a duty to properly maintain and increase the bankruptcy estate for the benefit of the creditors. In addition, the trustee, as the successor of the debtor’s rights and obligations, has a duty to properly organise and co-ordinate legal relations with interested parties. The trustee reports to the court and has to obtain approval from the court with respect to certain activities, such as disposition of high-value assets, buyback of secured assets or filing of lawsuits. Since the trustee owes a duty of care to all the credi - tors directly, if the trustee breaches its duty of care and causes damage to a creditor, the creditor may make a direct claim for the damage against the trus - tee, who would then be personally liable. Existing Officers/Directors In general, officers and directors owe a duty of care and a duty of loyalty to the company under the Com - panies Act, and if a breach of these duties is the cause of the company’s financial predicament, they may be personally liable to the company for damages. Fur - ther, commencement of bankruptcy or special liqui - dation does not automatically relieve directors and officers from all their duties: while officers and direc - tors (including those who have already resigned) do not owe any obligation directly to the creditors, they would still owe a duty to provide information to the trustee. Distressed Disposals The trustee (in a bankruptcy) or liquidator (in a special liquidation) has authority to dispose of the debtor’s assets. Certain dispositions (eg, where the value is over JPY1 million) must be approved by the court. There is no general rule regarding granting “free and clear” title to a purchaser of the assets, thus it
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